[HIGH COURT OF AUSTRALIA.] Sesion Fela z lone Py v Foll National gion Lidv FCT.

[HIGH COURT OF AUSTRALIA.] Sesion Fela z lone Py v Foll National gion Lidv FCT. - [1938] HCA 73 - HCA 1938 case summary — Zoe

[33]

The assessments are based upon returns by the respective appellants for an accounting period of twelve months ending 24th September 1933 accepted by the commissioner under sec. 32 (3) of the Income Tax Assessment Act 1922-1933. The appellant, Sun Newspapers Ltd., was incorporated on 29th March 1920. For some years it conducted the Sydney evening newspaper called the Sun and the Sunday Sun. It also conducted the Newcastle Sun and, as part owner, the Daily Pictorial and Sunday Pictorial. It was conducting these newspapers in the year 1929. Rival newspapers called the Evening News and the Sunday News, as well as a weekly paper called the Women's Budget, were at that time conducted by a company called S. Bennett Ltd. The two companies resolved upon an amal- gamation of their interests. On 9th August 1929 they entered into an agreement with a trustee for an intended company to be called Associated Newspapers Ltd. This company, which was registered on 9th September 1929, is the other appellant. Under the agreement it was to issue a large part of its nominal capital to the shareholders of the two constituent companies in exchange for their shares in those respective companies. The number and proportions are set out in the agreement, but they are not material to the questions raised for determination. What is material is the fact that at that time 56,000 shares in Sun Newspapers Ltd. of the face value of 10s., half the face value of the remaining shares, but bearing twice the tate of dividend, were held by employees in that company and upon special terms. These shares were dealt with specially under the agreement and under a supplemental deed dated 31st July 1930. It is sufficient to say that as a result 22,600 of these employees' shares were outstanding at the beginning of the accounting period upon which the assessments were based and were not held by the appellant Associated Newspapers Ltd. In the agreement for the merger that company was described as a holding company but it did not rigidly adhere to that character. On 24th December 1929 it entered into an agreement for the acquisition of two further existing newspapers,

[36]

Guardian and the Sunday Guardian were for a time printed an¢ published at the office of the vendors, and then they were transfer to the offices of S. Bennett Ltd. On 19th August 1931 an agreement was executed between Associated Newspapers Ltd. and Sun Ne papers Ltd., the purpose of which was to end the publication by the former of the Daily Guardian and by the latter of the Dai Pictorial and Sunday Pictorial and to provide for the publication the Sun offices of a daily paper to be named the Daily Telegraj and for the printing and publishing of the Sunday Guardian by Sun Newspapers Ltd. on behalf of Associated Newspapers Ltd. was quickly followed by an agreement of 14th October 1931, purpose of which was to provide for the cessation of the Sund Guardian and the publication of the Sunday Sun and Guardian continuation of the Sunday Sun. Shortly afterwards, namely, 10th November 1931, the two companies entered into a agreement by which Sun Newspapers Ltd. undertook to print am publish the Daily Telegraph on certain terms, which included division of profits with Associated Newspapers Ltd. In the m time, under the authority of Associated Newspapers Ltd., publication of the Evening News by S. Bennett Ltd. had cea Its last issue was published on 21st March 1931. But another evenin} paper came into the field, the World. This was published b company called Labor Papers Ltd. By an agreement dated November 1932 this company granted an option to an " invest until 9th November 1932 for a " lease " of the newspaper, includin its premises, machinery and plant, at a rent. The optionee was formacompany. This he did under the name of Sydney Newspapet Ltd., and with the co-operation of a journalist who was a son of managing editor of the appellants' newspapers he made preparatiol for launching a new evening paper in succession to the World, | be called the Star. It was announced that this paper would be so for one penny. The existing morning and evening papers sold f penny halfpenny. The appellants took alarm and their mana

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editor was entrusted with the task of preventing the sale at one penny of the threatened evening newspaper. Some doubt is cast on the extent of his authority, but, however that may be. he made an agreement with Sydney Newspapers Ltd. and its two sponsors by which in consideration of a sum of £86,500 they undertook for three years not to be associated with the production or publication of a daily newspaper within three hundred miles of Sydney, and to control for three years the plant, machinery and premises used in the production of the World. The agreement contained other stipulations of minor importance. If during the three years Associated Newspapers Ltd. required it, Sydney Newspapers Ltd. were to produce a daily or a Sunday paper by means of the plant, and if the plant of the former broke down, the latter company was to produce any of its publications. A place was to be found by Associated Newspapers Ltd. on its staff for the son of its managing editor and the same thing was to be done for another journalist who had been employed for the World. That newspaper went out of existence on the same day as the agreement was made, 9th November 1932. The agreement was honoured by the appellant companies' boards. During the course of the accounting period with which these appeals are concerned, payments amounting to £44,830 were made under the agreement in respect of the £86,500. Under the provisions of the agreement for taking over the various responsibilities connected with the World, a further sum was paid during the period amounting to £2,831, which with the former sum made £47,661. Although the agreement was made in the name of Associated News- papers Ltd., these payments were all made by Sun Newspapers Ltd. In the profit and loss account of that company the burden of the £86,500 was spread over three years and for the accounting period under consideration a debit of £24,363 Os. 8d. was made. In the return of the company for income tax it was shown as a deduction. The Commissioner of Taxation disallowed the deduction, and one of the grounds of appeal from the assessment is that a deduction either of £47,661, of £44,830 or of £24,363 Os. 8d. should be allowed from the assessable incomes either of Associated Newspapers Ltd. or of Sun Newspapers Ltd.

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respect. The question to be decided is, Does the foreign company carry on its own business or is the business in fact carried on by the English company ? Where a company whose shares are thus held in their entirety, or practically so, by another company is merely acting as a trustee or agent for the shareholding company, or where the company is a mere sham, simulacrum, or cloak, or is kept in being for the purpose of presenting the fiction that property is owned by it, it is competent for the commissioners to look at the reality of the situation, and find that the business is carried on by the shareholding company." To the cases cited in the note, which I shall refrain from setting out, it is necessary to add a reference to the discussion of the same authorities by Phillimore J., as he then was, in Kodak Ltd. v. Clark (1), affirmed in the Court of Appeal (2). The recent decision of the Privy Council in Z.B. M. Co. Ltd. v. Dominion Bank (3) marks the limits of the principle invoked by the appellants. There, after remarking that one of the judges below had been misled by some remarks of Cozens-Hardy M.R. in Gramo- phone and Typewriter Ltd. v. Stanley (4), which he quotes, Lord Russell of Killowen proceeds (5) : - '' But this can mean only that, on the facts of a case, it may appear that the legal entity has not become the owner of a business, but is merely carrying on, as agent for another person, a business which is the property of that other person ; just as, on the facts of a case, it might appear that an individual who was carrying on a business was not the owner thereof, but was carrying it on as agent for another person who was the owner thereof. Sir H. H. Cozens-Hardy M.R., did not mean, and, in the face of the Salomon Case (6), could not mean, that, notwithstanding that a business is in fact and in law the property of a separate legal entity, a limited company, it could be held, for taxation purposes, that the business was the property of some other person, and that the company was carrying on the business as agent for that other person." In the present case the great degree of control exercisable and exercised by the board of Associated Newspapers Ltd. over the conduct of the newspaper business is relied upon. The managing editor was appointed by an agreement of 9th September 1931 made with

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Associated Newspapers Ltd. and under it he was given wide po of managing the editing, production and distribution of newspaper: controlled through other companies as well as newspapers ov by it. During the accounting period, the Sun, the Sunday Sun an the Daily Telegraph were published at the Sun office and also the Women's Budget. S. Bennett Ltd. remained in existence until 193¢ but at that time it did not operate. About 98} per cent of shares of Sun Newspapers Ltd. were held by Associated Newspap Ltd., the rest being in effect employees' shares. In the procee of the boards of directors, excepting perhaps the matter of remunera- tion, no practical distinction was made between the separ: individualities of the two companies. The personnel of the boards was not however quite identical. But as against all Sun Newspapers Ltd. acted in every way as the proprietor of newspapers and the publishing business, kept separate accoun made separate returns for taxation purposes, declared dividends on its shares and was treated in every way as continuing to be, as it originally was, the company conducting on its own behalf, that is, in the interests of its shareholders, its own extensive enterpr In the accounts of both companies a moiety of the Sunday St profits, amounting to £15,084 15s. 1d., was shown as a credit of Associated Newspapers Ltd. against Sun Newspapers Ltd. I am clearly of opinion that there was no relation of principal and aj but that the property in the whole undertaking conducted by 8 Newspapers Ltd. was vested in it and vested in it beneficially, is, for its shareholders whoever they might be. In fact the employe shares would have made it difficult to ignore the separate personal of that company even if there had been any resolve to do so. Weston for the commissioner contended that, even if there had an agency, yet, as Sun Newspapers Ltd. had declared dividends a Associated Newspapers Ltd. received the income under that g sec. 16 (b) (i) of the Income Tax Assessment Act and sec. 5 (1) (b) the Income Taw Act would apply, and this may well be so. But on the facts I think that it is clear that these provisions apply to th sum brought under tax as net dividends, namely, £137,842 (£147,015

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